BR: Financial Analysis through December 2007

We have analyzed the financial statements of Broadridge Financial Solutions (BR) for the quarter that ended on 31 December 2007. Broadridge's results were reported in this press release and this 10-Q filed with the SEC.

Broadridge was spun off by Automatic Data Processing (ADP) to shareholders on 30 March 2007. The new company provides investor communication, securities processing, and clearing services to financial companies. Company shares advanced nicely during the final quarter of 2007, despite the ills of the financial industry; however, the continuation, if not deepening, of these problems have caused Broadridge's stock price to decline during the last few weeks, as can be seen in the figure to the right.

We first evaluated Broadridge after the September 2007 quarter. We didn't compute gauge scores at that time because the GCFR methodology requires a historical record to which current financial metrics can be compared.

Before we review the latest values for these metrics, we will examine the Income Statement for the recent quarter. We didn't attempt to predict Broadridge's earnings in advance. Note that Broadridge was part of ADP during the year-earlier period. Please also note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		Dec 2007 (actual)	Dec 2006 (actual)
Revenue (1)		465	431
Operating expenses
	CGS (2)	(346)	(333)
	SG&A	(63)	(51)
	Other	0	(0)
Operating Income		57	47
Other income
	Investments	0	0
	Interest, etc. (3)	(10)	(1)
Pretax income		47	46
Income tax		(18)	(18)
Net Income		29	28
		$0.21/sh	0.20/sh

<sup>1. Net revenues= Services revenues + Other revenues - Interest expense from securities operations.
2. Cost of net revenues
3. Other expenses, net (mostly interest)</sup>


Revenue in the quarter was 7.8 percent above the value in the year-earlier period. Year-over-year Revenue Growth was 7.0 percent. The Cost of Goods Sold (CGS) -- called Cost of Net Revenues on Broadridge's Income Statement -- was 74.3 percent of Revenue, down 3 percentage points from 77.3 percent in the December 2006 quarter. However, Sales, General, and Administrative (SG&A) expenses increased by 1.6 percentage points, from 11.8 percent to 13.4 percent of Revenue.

Operating Income, as we defined it, was 21 percent more than the amount attained in December 2006.

So-called "Other expenses" hurt the recent quarter in the comparison with the year-earlier quarter. These expense were up $8.6 million. The 10-Q indicates that increased interest costs on borrowings was the reason "other expenses" soared. These borrowings might not have been necessary when Broadridge was part of ADP.

The Income Tax Rate was about 39 percent in both quarters.

The greater interest expense in the December 2007 quarter limited the increase in Net Income to a mere 3.4 percent, when compared to the year-earlier value.


Since it has only been nine months since Broadridge became a separate company, we're going to need at least one more quarter before we have a solid enough financial baseline to compute gauge scores. In addition, a temporary cash flow situation described below would have had a misleadingly negative effect on the gauges if we had tried to estimate the scores.

Cash Management.

• Current Ratio = 1.3; down from 1.4 in June 2007. We prefer values over 2.0, but lower figures aren't unusual for well-capitalized companies.
• LTD/Equity = 86 percent, which is a pretty significant amount of leverage, but the debt level dropped from 116 percent six months earlier.
• Debt/CFO = N/A because CFO was negative as a result of one-time expense.
• Days of Sales Outstanding (DSO) = down to 55.7 days from 85.8 days last June, using the current level of receivables instead of an average
• Working Capital/Market Capitalization = 12.3 percent; down from 15.6 percent
• Cash Conversion Cycle Time (CCCT) = 46.2 days, down (good) from 66.3 days; we need more data to determine if this measure of efficiency is relevant.
  

Growth.

• Revenue growth = 7.0 percent year-over-year, using proforma data
• Revenue/Assets = 75 percent, for this measure of sales efficiency
• Net Income growth = 7.9 percent year-over-year, using proforma data
• CFO growth = -67 percent year-over-year; we're skeptical that this number is representative of the company's future cash flows.
  

Cash Flows from Operations was -$272.5 million in the December 2007 quarter -- the negative number signifies that cash was used for operations -- primarily because of a $380.0 million loan that was repaid on 17 January 2008.

Profitability.

• ROIC = 15.4 percent.
• FCF/Equity = N/A because of the aforementioned Cash Flow situation
• Accrual Ratio = a horrible 16 percent because of the same Cash Flow situation.
• Operating Expenses/Revenue = 83.3 percent, down from 84.3 percent one year earlier
  

Value. Broadridge's stock price edged up over the course of the quarter from $22.15 to $22.43, which wasn't bad performance when one considers the price was $19.51 when the company was spun off from ADP. However, the shares are now back down to about $19.00. [In the ratios below, the first number is based on the 31 December share price, and the number in parenthesis uses the current price.]

• Enterprise Value/Cash Flow = N/A
• P/E = 15.4 (13.0)
  
• P/E to S&P 500 average P/E = 10 (23) percent discount
  
• Price/Revenue ratio = 1.4 (1.2)
  

The average P/E for stocks in the Business Services" target="_blank" href="http://biz.yahoo.com/ic/760.html" id="iq:h">Business Services industry is 24.5.